China

China seeks to make it big in the US

UNITED STATES: One thing is certain in the US: the Chinese are coming. It is just a question of when, and that applies to China's wind turbine and component manufacturers as well as Chinese equity or debt financing. The timing is hazy only because of the infancy of Chinese wind exports to the US, which is still seen as a prime wind market despite its complexity.

Presidents Hu Jintao and Barack Obama

Heading the pack is Goldwind, China's second-largest turbine maker, which announced in December it would supply machines to the 106.5MW Shady Oaks project in Illinois. Sinovel recently signed a contract with the Massachusetts Water Resources Authority to provide a 1.5MW turbine for installation in Boston - a project financed with federal government stimulus money.

Yet there remain many hurdles for Chinese players, including the lack of a US track record for their turbines and questions about their performance levels. There are also doubts about warranties, service and recourse if something goes wrong. Another difficulty is the vastly different and very complex US market economy - compared with China's state-run economy - and its emphasis on low costs and tax incentives.

Grid operators governing electrical output have increasingly tight standards in the US, while China has no national standard yet. Chinese certification is not fully understood, and there is a lack of verifiable financial or structural information about Chinese companies, whether state-owned or not.

Worlds apart

There are cultural and political clashes, too. In the US, the emphasis is strongly on American goods and jobs. For China, its meteoric rise is taking place in entirely uncharted territory.

"There will be a steep learning curve on how to do business in the US," noted Gearold Knowles, a China expert at Washington, DC-based law firm Schiff Hardin, speaking on the sidelines of Infocast's first US-China Wind Summit in San Francisco late last year. Caitlin Pollock, a senior analyst at IHS Emerging Energy Research, added that Chinese companies generally lack global experience, clout and reputation.

Jan Paulin, managing director of consultancy Solowin Renewables, recounts a telling anecdote. In 2009, Paulin was considering buying turbines from a Chinese firm. He was impressed with the factory in China and its quality control. But the Chinese company insisted all agreements, including the sale, would be governed by Singapore law. "They said it would be unfair to use US law," he said. Eventually, the Chinese representatives angrily walked out of a meeting. "On a very simple issue, that's how wide the gap is," says Paulin.

China's new entrants, like any other company, must face the doldrums in the US economy, decreasing power demand caused by the recession and continuing low natural-gas prices. Uncertainty over federal renewables policy in the longer term is not helping, either. The latter is especially disconcerting to companies operating in China, where the government's top-down policy means utilities can be mandated to buy wind power.

Exuberance about China's arrival has dropped somewhat since the American Wind Energy Association's annual conference in Dallas, Texas, last spring. The Chinese government, however, is officially encouraging investment in the wind sector abroad. Chinese companies are starting to grapple with bilateral business with the US or are waiting on the sidelines.

At the US-China wind summit in December, the Chinese players were not always in the conference room, noted Sebastian Meyer, research director at Beijing-based consultancy Azure International. "Perhaps the Chinese companies now actively pursuing the US market are adopting a lower profile," said Meyer. As for Chinese attendees absent from the conference room, "they seemed to be too busy making deals", he added.

Reality rules

Harsh realities are starting to emerge. The US trade representative (USTR) is investigating a complaint by the US steelworkers union accusing China of illegally propping up its wind industry. As a result, some Chinese companies are now hesitant to invest, according to Andrew Hang Chen, managing partner at Usfor Energy, a US-based consultancy for incoming Chinese state-owned wind companies. The USTR's move is seen as anti-Chinese and intimidating, he said, rather than as law enforcement.

The stakes are high for Chinese wind companies and investors, as well as for their US counterparts. Even if only the top-five Chinese manufacturers make it into the US market, competition will ramp up for turbine makers that already have a significant share, noted Ed Einowski, a partner at law firm Stole Rives.

As much as 1GW of Chinese wind investment - worth $2 billion - could flow into the US over the short term, half of which would consist of imported Chinese turbines, predicted Chen. Less conservatively, that investment could rise as high as $6 billion, he said.

Chinese turbines are competitively priced at home, at less than $600/kW, compared with prices in the US for non-Chinese turbines of $1,100-1,200/kW, although Chinese operating costs can be higher. "With this kind of price, and with (Chinese bank support), I think Chinese manufacturers are coming to the US," said Chen. "Let's just work out how to make it work." Chinese turbines may cost 30% more if made in the US, or the equivalent of up to $800/kW, he estimated, because of US labour and supply-chain costs.

It is unlikely that China will become an important part of the US wind sector for a few years, say experts.

They think that Chinese turbines are "unbankable" using American money because of the lack of a track record on US soil. China's big five power utilities often withhold data, while manufacturers have limited self-collected operational data from supervisory-control and data-acquisition systems, said Chen.

The lack of operating history in the US is a hurdle any newcomer to this market must face. Due diligence by independent engineers is a prerequisite for financing, and this process can take up to four years. Financiers often look for a minimum of 100 turbine years at 95% availability - for example, 50 machines available for operation 95% of the time over two years.

Fewer than 30 Chinese turbines are operating in the US, all in pilot projects such as Goldwind's 4.5MW Uilk project in Minnesota, the 10MW of Baoding Huide turbines installed in Texas in 2008, Sany's 10MW recently installed in the same state, or the new project under construction, also in Texas, by Guodian United Power, a fast-rising player expected to rank third in terms of new installations in China in 2010. While Chinese suppliers have yet to earn full confidence globally in the quality of their turbines, some insiders expect speedy improvement.

Money matters

Another hurdle repeatedly discussed at the summit was US concern about recourse. If Chinese manufacturers have no operations or assets in the US, how do they stand behind warranties in the US, wondered David Benson, a partner at law firm Stoel Rives. There must be financial guarantees, agreed Roger Rosendahl a partner at law firm DLA Piper. "You can't sue in China or enforce a warranty in China," he said.

To make headway in the US, Chinese manufacturers will have to continue building pilot projects with US joint-venture partners, speakers said. It was also argued that the Chinese may need to supply vendor financing covering 100% of turbine cost and about 80% of construction. The balance of financing could then be provided by an equity investor with tax exposure in the US. "If the Chinese bring financing to the table, then the issue of 'who are these guys?' goes away," said Rosendahl. "It could be a decisive factor for getting the deal done." As Mike Garland, CEO of Pattern Energy, put it: "You have to say: 'I'll buy my first deal.' Prove that you've got the guts to stand up and make it in a different market."

To enter the US market, not only will a Chinese manufacturer initially have to shoulder finance risk, but also offer favourable warranty terms of at least five, if not ten or more, years to appease worries about the technology and service being unproven. American equity investment could become available if the manufacturer can offer adequate support for operations and maintenance. Goldwind, for example, agreed to buy the Shady Oaks project in Illinois from Ireland's Mainstream Renewable Power, which will continue to participate in the project until construction is complete. Financing had not been finalised by the end of last year.

Some Chinese firms are backed with impressive credit lines. Sinovel, for example, has a $6.5 billion credit grant from the China Development Bank (CDB) and a $20 billion credit line from the Industrial and Commercial Bank of China, said Li Lecheng, senior vice-president of Sinovel Wind. CDB has set up a $6 billion credit line for Goldwind whereby CDB will extend debt financing to the manufacturer's customers in markets outside China. Some money for US investment is also available from the company's recent initial public offering, said Matt Olive, director of sales at Goldwind.

A developer would also want an assurance that spare parts will be available over 20 years, as well as design documents and manuals in English, said Tony Dorazio, senior vice-president of Duke Energy Generation Services' wind group. A development using Chinese turbines would have to offer a price that is $10/MWh - about 16% - lower on a power purchase agreement in the US, to make up for its lack of a track record.

The difficulties facing Chinese manufacturers entering the US were summed up by Rosendahl. "If you're coming to the US, you don't quite know enough to be as scared as you should be," he told the audience at the summit. "It's extraordinarily different."

So wide is the gap of understanding that Sany insisted on working with Chinese investors to build its project in Texas. "We will not form a joint venture with developers," said Jason Yang, a Sany spokesman. "There is too much of a lack of understanding to partner with an American company - there's a lack of trust both ways."

How do you gauge a Chinese firm if you want to set up a joint venture or buy its wind turbines? For a westerner, it is not always easy, said experts at Infocast's first US-China Wind Summit in December. One description that kept recurring was "opaque".

The fact that initial public offerings are being made does bring new levels of accountability and transparency. Yet, if a firm is listed on a Chinese stock exchange, it may only be a partial listing. When partly state-owned Xinjiang Goldwind Science & Technology, or Goldwind, floated on the Hong Kong stock exchange in October, less than 20% of the company was listed.

Still, the requirements for a Hong Kong listing are more rigorous than for the Shanghai and Shenzhen exchanges. As a result, Hong Kong listings offer more international credibility and give companies a better chance to diversify overseas, said Caitlin Pollock, a senior analyst at IHS Emerging Energy Research.

Many Chinese firms are partly state-owned. In fact, until about 15 years ago, everything in China was state-owned, notes David Hofmann, North America director at InterChina Consulting. And the links between the private and public sectors are still nebulous.

If a company is partly state-owned and not listed, do you know who you are dealing with? Not necessarily, Hofmann says. The firm could be owned by two or three different government bodies. "It's not easy to get financial information on non-listed companies, especially if they are state-owned," says Pollock.

Disclosure of project performance is also inadequate, says Sebastian Meyer, research director at consultancy Azure International. The style of doing business is very different. No Chinese company is truly global, and Chinese company officials are generally not familiar with the American business style based on legal contracts - there are more lawyers in California than in the whole of China. For Chinese companies, a contract is often seen as a chance to renegotiate, says Hofmann.

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